Wednesday, 26 November 2008

US Treasury Secretary Henry (Benito) Paulson has unveiled yet another $200 billion bailout package to help Americans max out their credit cards this Christmas ($200 billion that will be "expanded and increased overtime")and yet another $600 billion package to buy up mortgage securities. (Story here.)

If you've lost count of the number of hundred-billion dollar bailout packages thrown into US markets, then you're not the only one. Paulson himself is all at sea too. He's already lost track of what happened to the "urgent" $700 billion bailout he secured pre-election to buy up mortgage securities (memo to Henry: you blew that on loads of Super Highly Important Things), so now he wants another one.

"I wish," says Paulson in describing yet another desperate attempt to prop up an economy destroyed by years of credit inflation with even more inflated credit, which pretty much describes his economic plan. A wish predicated upon a printing press.

But will it "work"? Well what do you think? More multi-million dollars of printed money poured down that black hole marked failed economic theory? More printed money that can only further dilute the rapidly diminishing purchasing power of the US dollar? More diminution of the already parlous pool of real savings to prop up junk that's already gone bad? What the hell do you think will be the result of all that outright fucking foolishness!

It's harder for American to borrow now for a very good reason: because they've been borrowing and spending other people's money on junk. American consumers have been borrowing lines of inflated credit from Alan Greenspan's Fed to buy up houses they couldn't afford -- houses they were told were going to be "investments" (yeah right) paid for with inflated credit they were told was real money; meanwhile American producers were borrowing from the same inflated credit lines to pour that same debt-backed money into what are now all too clearly malinvestments.

That's why the economy tanked. Propping up those bad "investments" now just leaves the poison in the system. What's desperately needed, as Robert Murphy so gently points out to a colleague, is not to prolong the agony, or squander even more resources while the economy tries to adjust to a sustainable configuration:

Of course nobody likes vomiting. But if someone has ingested poison, throwing it up is a good thing. Efforts by physicians to numb the person's gag reflex and settle his stomach will lead to disaster.

To a disaster even bigger than the present disaster. Believe it. it will happen. Because the crux of the present problem can't be fixed with a printing press.

The crux of the current economic malaise [as Steve Saville points out] is that mal-investment on a grand scale over many years depleted the pool of real savings. Consequently, recovering from this situation requires the accumulation of savings -- on an individual-by-individual basis and an economy-wide basis. An increase in savings will lay the foundations for an eventual strong and sustainable recovery, whereas policies that discourage saving will act to prolong the agony.

Expect the agony to be prolonged until such time (if ever) that policymakers actually buy themselves a fucking clue about what the hell is going on. Here's that clue: "We are in this mess because the pool of real savings has been depleted and it is time to stop spending and replenish savings." Here's another: "If money is used to prop up failing companies, that's particularly bad since it is an attempt to override market realities, an attempt that is about as successful as trying to repeal gravity by throwing things up in the air."

We can either endure the immediate pain of correcting to the present reality and then building back slowly to real prosperity on the basis of sound money and real savings; or we can continue to fake reality and ensure the pain goes on for years . Which would you prefer?

The western economies are stuffed - the US and UK in particular. Take a look at this graph, which shows future US mortgage resets. We've had subprime, but two other poor home loan categories are not due to hit the US until 2010 and 2011. Incidentally, I came across this graph in this fantastic tribute to Peter Schiff, which shows that economists rock after all.

Well, mostly good. He spoils it with the last four words.

UPDATE 3: Oh, for fuck's sake. The printing presses have just been turned on at Number One, The Terrace: Bill English has just announced a $7 billion "stimulus" package for the New Zealand economy. Read $7 billion of extra money that the government is going to print and spend instead of what you might have done with it -- like, who knows, invest it productively?

9 comments:

The bailout is causing record low rates at all lenders. The bailout is causing lenders to practically give away money. You would be surprised at how much cheap and in some cases "free" money is going around out there.

using my personal experience. I borrowed in the UK first in 2001. around 2 years ago I got on a tracker at .4% above Bank of England Base. resets ( end of term) on offer from same bank now are 2.4% over base. but the base has dropped by 2% in the last 3 months. so net net there is no difference.

I am in gravy as long as rates are low. to fix now for 5 years would cost about 3.2% over base.

so i dont see that the resets are as big a problem as is being made out.

Treasury officials suggesting that banks need to be forced to increase credit card based consumer debt on the other hand is another story.

there is madness here and it has impacted all of them. the lesson they learned from their depression histories is that they must DO SOMETHING

I got told an interesting story. Goes along the lines that we are all so very lucky that the boss of the printing presses is Pope Bernanke the maker of miracles. He's the perfect prophet apparantely. He spent his entire adademic career learning all about the last Great Depression. He knows all about it they say. So much he knows that he's figured out exactly how to make the next one really different from the last. He's goning to print a shit load of potty paper because that's what they didn't do enough of the last time around. And then he's going to flush the whole economy with it.

Forget all you know about the supposed purpose of Western governments and assume one thing: the purpose of the NZ Government is to perpetuate the existence of the NZ Government in more-or-less its present state. Nothing more.

I think this is the first time I have ever made a comment on your blog, I normally stick to Kiwiblog because that is where most people go, but I just want to say, you are RIGHT, Peter Cresswell; I am saddened and sickened at THIS particular piece of news, and no-one else this side of the socialist lapdog MSM, including Kiwiblog, is going to tell it like you do.

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